Monsters of Rock: CBA cuts iron ore forecasts as BHP declares job done on South Flank
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The Commonwealth Bank has finally slashed its iron ore forecasts for 2021 and 2022 on the back of the steelmaking commodity’s 50% decline in value since reaching all time highs in May.
It had expected iron ore prices to drop to US$170/t in the fourth quarter before striking US$100/t in 2022.
The pace of the price decline was brought about primarily by cuts to steel output mandated by China’s Government and background concerns about demand if the Chinese property market bust. CBA now sees iron ore averaging US$100/t in the December Quarter before sliding further to US$85/t next year.
Prices briefly dipped to US$93/t last month before returning to levels of ~US$118/t ahead of China’s National Day holidays, which end today.
Vale’s promise to lift supply by increasing the production capacity of its Brazilian iron ore operations by 1.6% next year could also weigh on the seaborne market.
It’s not all bad news though. Commbank analyst Vivek Dhar says there is upside on the new CBA forecast.
The key catalyst, as many analysts have mused, is the potential for steel production cuts to ease after a ‘green’ Winter Olympics in Beijing in February.
“We see China’s steel output remaining under pressure until the end of Q1 2022, as authorities are keen to show a ‘green’ Winter Olympics in February,” he said.
“We see China’s steel output recovering in Q2 2022, before coming under pressure again in H2 2022 as mills are forced to meet annual targets.
“We see upside risks to our price outlook linked to policymakers relaxing steel output cuts if steel prices rise high enough to stoke inflation concerns. Policy that favours economic growth would accelerate this outcome, particularly as infrastructure investment will likely be at the heart of it.”
BHP (ASX:BHP) has declared job done on its 80Mtpa South Flank mine, opening the largest new mine built in the Pilbara in 50 years in a star studded ceremony.
The mine is regarded as a ‘technologically advanced’ trade up on the mine it is replacing, Yandi. Its big selling point is that it will bring BHP’s iron ore grade back from 61% to the benchmark level of 62% and make the world’s biggest lump iron ore producer, increasing from 25 to 33% of its ~290Mtpa Pilbara output.
Lump requires less processing than fines, meaning it is more efficient and generates less pollution for steelmakers, who pay a premium for the product on the benchmark price (although that premium far smaller now than in the halcyon days of May-June this year).
“South Flank is BHP’s most technically advanced mine and creates the largest iron ore hub in the world. It will sustain more than 600 ongoing jobs, plus opportunities for hundreds of local businesses and billions of dollars in royalties to Western Australia,” BHP WAIO president Brandon Craig said.
“South Flank’s product has high lump content and increases the quality of BHP’s blended products for steelmaking customers, improving blast furnace efficiency and supporting decarbonisation efforts. South Flank’s premium iron ore will be shipped to global steel producers to build electricity, transport and urban infrastructure around the world over the next 25 years.”
BHP was slightly in the red today on an even day for the resources sector, as the big lithium miners (good) and the big coal miners (bad) balanced the Materials sector to a 0.26% gain amid a reasonable day for the ASX 200 as a whole.
Red 5 recorded a massive 17% gain after announcing it remains on time and on budget on the $226 million rebuild of its King of the Hills gold mine.
The major construction project will convert the small underground gold mine into a major open pit, producing around 170,000ozpa with a mine life of 16 years and a reserve of 2.4Moz.
The installation of the SAG mill at its new processing plant is now under way.
“September was another solid month of progress for our construction and development teams, and King of the Hills is now rapidly taking shape as Australia’s newest mid-tier gold mine,” managing director Mark Williams said.
“Thanks to the diligence and hard work of our in-house team, led by Project Manager Warren King and our EPC contracting partner MACA Interquip, development is powering ahead, and we continue to pass important milestones each month.”